Bear Market Week! If You’ve Cashed Out Your Stocks, Start Easing Back In
If you’ve panicked and have already gone to a cash position, start dollar-cost averaging your way back into the market over the next 12 to 18 months. For example, if you panicked and pulled $225,000 out of the market recently, you could start moving roughly $12,500 back in on the same day each month over the next 18 months.
It’s critical to be disciplined to do this every month, especially in the months where the market falls as this gives you an opportunity to buy the shares cheaper.
This strategy removes much of the agonizing decision-making that goes along with trying to time the market to go back in at the best price.
In essence dollar-cost averaging will help you avoid the mistake of moving the money in one lump sum back into the market right before a precipitous drop. And it’s also a lot easier on your emotions to spread your entry point out over 12 to 18 months rather than putting all the money back into the market at one time.
This strategy tends to lower the price that you’ll pay for your investments over time, leading to less of a loss if they continue to decline, and will generate greater gains when the investments start rebounding.
In a similar fashion you should continue contributing on a monthly basis into the market in your 401(k) plan, especially when the market is going down. The vast majority of the time this will help you get an average price on your shares that will be lower compared to someone who gets rattled and discontinues buying shares every time the market drops.